Government Funding: Are Australia's Miners Paying Their Way?

Australia's miners are drawing funds away from key state government responsibilities such as health and education, according to an analysis of state budgets by the Australia Institute. Unsurprisingly, the research policy institute was promptly attacked for mounting an ideological campaign against the mining industry. Whatever its aim, the study did disclose some worthwhile information about how the fiscal cake is divided.

In the last few weeks, in the aftermath of the Commonwealth budget, I have written in the AllthingsConsidered email about the respective contributions of medical research and mineral exploration to the Australian economy. I have suggested that we do not know which offered the better payback for the dollars spent making it hard to judge whether the government's priorities are sound or not.

The Australia Institute study entitled "Mining the Age of Entitlement" coincidentally tackles the same question of government priorities from a slightly different angle.

The Canberra based research institute is frequently described as left leaning. Whatever its political disposition, the institute has performed a worthwhile service in delving into sometimes opaque state budget documents to extract and reassemble information about how funds are spent and the extent of concessions being handed out.

The raw data alone leaves us none the wiser about how much should be spent on one sector versus another. Nor does it offer a methodology for tracing the benefits.

For example, mining industry expansion leads to jobs, exports, higher national income and tax receipts which, in turn, are available to fund social programs. A dollar spent on a railroad to transport coal might result in a dollar being drawn from hospitals or other worthwhile programs in a capital constrained budget in the short term but permits a larger contribution to those programs once development has occurred. Hospitals and schools themselves create benefits for the industry which would need to be taken into account for a full understanding of the trade-off.

The Australia Institute report suffers from another shortcoming which is readily evident from its own commentary. Much government spending which benefits the mining industry also benefits other business activities. Railway and port construction, for example, can provide opportunities for multiple industry users not just mining.

The report does distinguish between spending that solely benefits the mining industry (53% of what has been spent over the past six years, on its analysis) and spending that benefits others as well as the industry. Consequently, the industry is right to complain that government beneficence is being exaggerated if all spending in favour of the industry is added together.

The Australia Institute report does offer more clear-cut insights into the impact of mineral royalty payments on budget outcomes. Whether the industry should be subjected to royalty regimes or profit based taxes was at the heart of the rationale for the Rudd era super profit tax on mining income.

Economists have generally favoured a profit based tax as being more efficient than the existing state based system of royalties. A tax based on profitability is less likely to distort investment decisions. Taxes on production activity, as the state royalty measures tend to be, are likely to make investment less attractive and reduce the overall size of the industry.

The primary contrary argument in favour of the state royalty regimes is that governments are required to do more as development occurs. This includes the provision of infrastructure but also sometimes less obvious tasks such as looking after community health and welfare programs to which all residents are entitled whether they are connected to mining companies or not.

These obligations do not necessarily vary in their fiscal impact with changes in profitability. Sometimes, the burden actually grows when profitability is weakest and discarded workers look to government funded safety nets. On this view, it makes sense for royalties to be based on activity.

In the theoretically ideal world, a dollar of royalty would flow back as a dollar of services to the region in which mining is occurring. Historically, the mining industry has claimed that the major mining states were using royalties to get more from the industry than they needed to fund the marginal cost to government of mining development.

According to the institute, Queensland and Western Australian government budgets accounted for 90% of the states' anticipated expenditures and concessions benefiting the mining sector during the financial year ended June 2014. The budget impact on these two states amounted to a combined $2.9 billion in the past year and $12.9 billion over the five years before that.

The institute's review of royalty collections points to these two states raising an estimated $8.4 billion in the year just finished. The New Wales imbalance was even more pronounced. It expected royalties of $1.5 billion in exchange for spending and concessions worth just $136 million.

In other words, the governments are taking more than they are giving back even using what the industry claims are numbers doctored to exaggerate what the industry is receiving in return.

The industry might just as easily embrace this report as criticise its motivation because it shows it more than paying its way. In reacting emotionally against what it perceived to be the political proclivities of the authors, the industry probably missed a chance to claim some credit for how much it is contributing to budgets nationwide.

(John Robertson is a director of E.I.M. Capital Managers, a Melbourne-based funds management group. He has worked as a policy economist, corporate business strategist and investment market professional for over 30 years after starting his career as a federal treasury economist in Canberra. His daily Market Diary - Brief Thoughts on Current Issues is available at http://www.eimcapital.com.au/PortfolioDirect/daily_views.htm).

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